HMRC reveals 18,000 could lose protected benefits

HM Revenue and Customs’ figures reveal that 18,000 people risk losing enhanced protection on their pension benefits when automatic enrolment comes into force from October 2012.

People who applied for enhanced protection on A-Day on April 6, 2006 are protected from high tax charges if their fund is valued at more than the lifetime allowance when they start drawing their pension.

But this protection will be lost if any additional contributions are paid into a pension scheme. If this happens, any pension savings above the lifetime allowance would be taxed at 55 per cent.

Figures obtained by A J Bell through a freedom of information request reveal 18,574 savers could lose their enhanced protection as a result of being auto-enrolled into a pension scheme.

A J Bell marketing director Billy Mackay says: “Anyone holding enhanced protection needs to take measures to make absolutely certain they opt-out of being auto-enrolled as the financial consequences could be catastrophic. The Government should consider allowing enhanced protection to be retained provided contributions do not breach a certain threshold, say £1,000.”

The lifetime allowance for tax-privileged pension saving will be cut from £1.8m to £1.5m from April 6, 2012.

Last month, Money Marketing revealed concerns that people who had claimed protection on their pension pot could be hit with a massive unexpected tax bill as a result of auto-enrolment.

Hargreaves Lansdown head of pensions research Tom McPhail says high-earners should be able to permanently opt out of auto-enrolment.

A DWP spokeswoman says: “We are working with HMRC to alert individuals with enhanced protection in advance of the new employer duty coming in.

“Those applying for fixed protection will be provided with information at the time of application to inform them about auto-enrolment and the action they will need to take.”